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# The following data are reported for Moving Vans, Inc.:

Dividend yield 5%

Dividend payout 20%

Return on equity 15%

Assuming Moving Vans' dividend yield, dividend payout, and return on equity will remain constant indefinitely, the cost of equity capital is closest to:

Question:

Dividend yield 5%

Dividend payout 20%

Return on equity 15%

Assuming Moving Vans' dividend yield, dividend payout, and return on equity will remain constant indefinitely, the cost of equity capital is closest to:

A
17%.

Explaination

Using the constant growth dividend model, the price for a common stock is: $1202_w99_h42.png$

Solving for k : $2769_w102_h40.png$

where:

P = current stock price

D = year end expected dividend

k = cost of common equity capital

g = sustainable (constant) growth of equity, earnings, and dividends

The sustainable growth for a company's dividends equal the ROE times the earnings retention rate. The earnings retention rate equals 1 minus the dividend payout rate. Therefore:

g = 0.15 × (1 − 0.20) = 0.12

$9674_w323_h40.png$

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